The State of M&A in 2016: A Conversation with KSM’s Ammirati, Schmidt
Rosanne Ammirati and Brian Schmidt, partners at Katz, Sapper & Miller (KSM), participated in panel discussions about the state of the mergers and acquisitions (M&A) industry at Faegre Baker Daniels’ 2016 M&A Conference. Following the conference, Ammirati and Schmidt sat down to discuss key takeaways, their perspectives on the state of M&A and how they anticipate the market changing as the year progresses.
A Seller’s Market
Schmidt: Private equity groups have a lot of cash to deploy, and prices are continuing to rise, which is in line with what we’re seeing at KSM. The market has been trending this way for a couple of years. After the recession, companies began holding on to their money. Now, groups are looking to make deals, which benefits sellers, whether they are hoping for top dollar or the offer that provides the best fit for their culture and industry.
Ammirati: Increased competition has raised the multiples. Buyers are paying more and accepting lower returns to stretch into new industries or to increase market influence. Another interesting development is the distinction between companies that are privately owned and companies that are private equity or venture capital (VC) deals. VC deals are always on the market, but the goal of that type of transaction is to buy and sell. Those will always have a place. But many privately held company deals will not go through because the seller is not ready to sell. They have not completed their pre-due-diligence work to simplify the sales process. They are neither financially nor emotionally ready.
Ammirati: People recognize it is a seller’s market and will continue to be while the stock market maintains its volatility and interest rates are low. Cash in those vehicles is not providing returns, which means prices are going to remain high.
Schmidt: With the stock market performing poorly, we are going to see greater rollover equity. In the past, investors may have gotten all the way out of their company as a way to de-risk. Now, they still want that higher rate of return and will opt to remain a minority shareholder.
Ammirati: For many, that is the best of all worlds. Some of their money comes off the table, but they still get to realize potential appreciation of their property and be involved. Sellers will often choose rollovers as a way to stay involved with the business because they value all the relationships they have built with customers and employees. At the same time, a lot of the risk has been removed because they have additional cash. Most deals today are being realized with rollover equity.
Schmidt: Lessening the risk is a big factor for sellers. What keeps many of them up at night is that personal guarantee on bank debt.
Ammirati: We are still seeing deals in manufacturing and distribution, and people are continuing to chase technology. Old media like newspapers and radio are not favored targets, and oil and gas have slowed down. VC deals are shifting outside the United States to Canada and Europe because of how expensive transactions in this country have become. However, the United Kingdom’s recent vote to leave the European Union could impact that – though time will tell. With so much available capital and low interest rates, M&A will not get cheaper. Return is still the key factor, whether it is an existing company bringing money to the bottom line or one in growth mode.
Schmidt: Deals are happening all the time. A newer trend we are seeing is brokers connecting with CEOs, finding a promising business and then approaching a private equity group about pairing them together as an acquisition target.
Ammirati: Company owners should focus more on preparing their business with the best structure to realize an M&A deal. Where are they in their life cycle? What is their equity structure, and how can they best position themselves for a potential deal – whether it is now or several years away?
Schmidt: And if it is a family business, have they built a succession plan? A statistic presented at the conference was that only 30 percent of family businesses are passed to a second generation and just 12 percent are passed to a third generation. The key to a successful deal is being prepared from a corporate standpoint, having all documents up to date. Owners are so busy running their business that they are not always current on the necessary paperwork. We have seen deals not get done because the seller could not meet the buyer’s timeline. Taking time to prepare greatly increases the likelihood of a successful transaction.
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